Permanent Slow Steaming

Supervisor: Ove Krafft

Master Degree Project No. 2013:31 Graduate School

Master Degree Project in Logistics and Transport Management

Permanent Slow Steaming

A solution to manage the increased costs imposed by the 2015 SECA regulation?

Anton Brink and Johan Fröberg

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Abstract

In 1999 a decision was made that would prove to have dramatic consequences over a

decade later. The decision was made by the Council of the European Union, and addresses

the issue concerning sulphur content in marine fuels. In 2015, the maximum sulphur content

allowed in marine fuels within the European sulphur emission controlled area (SECA) will be

lowered from the current limit of 1.0% to 0.1%. To comply, shipping companies are

burdened with dramatic cost increases, derived from either switching to cleaner fuel or new

technology investments. By combining a theoretical framework with a case study, this thesis

will investigate the possibility to compensate the increased costs, associated with using

cleaner fuel, by utilizing the concept of slow steaming. Although very difficult to attain exact

data to calculate the economic effect of slow steaming, good estimations can be achieved

and the theoretical result indicates that a 10-15% reduction in cruise speed could

compensate for 50-80% the increased costs. There are however several factors which

complicate an implementation of slow steaming, these factors will be discussed in the thesis.

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Acknowledgements

We would like to thank everyone who contributed to this thesis with their knowledge, constructive criticism, advice, and encouragement.

Ove Krafft, our supervisor, for having high expectations and providing encouragement and guidance during the process of writing this thesis.

Carl Sjöberger, PhD candidate and former Chief Officer, for taking the time to provide us with constructive feedback and advice on how to go about during our work.

Lars Rexius, Managing Director at Unifeeder, for giving us valuable feedback and input regarding the operational aspects of providing a container feeder service.

Henrik Pahlm, Associate Professor at Chalmers Technical University, for assisting us in getting a much needed understanding of the technical aspects related to a ship’s fuel consumption.

____________________ ____________________

Anton Brink Johan Fröberg

Gothenburg 2013-05-17 Gothenburg 2013-05-17

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Table of Contents

Abstract ... 1

Acknowledgements ... 2

List of figures and tables ... 5

Abbreviations ... 6

1. Introduction ... 7

1.1 Background ... 8

1.1.1 The shipping industry ... 8

1.1.2 Containerization ... 9

1.1.3 Sulphur emissions ... 10

1.1.3 EU directives ... 11

1.2 Alternatives to comply with the SECA regulation ... 14

1.2.1 Low sulphur fuel ... 14

1.2.2 Exhaust cleaning systems and heavy bunker fuel ... 14

1.2.3 LNG ... 16

1.2.4 Methanol ... 18

1.3 Problem description and analysis ... 20

1.3.1 The SECA regulation; a challenge ... 20

1.3.2 SECA and fair competition ... 20

1.3.3 Ship operators must take action ... 21

1.4 Purpose ... 23

1.5 Research question ... 23

1.6 Limitations ... 24

2. Methodology ... 26

2.1 Research design ... 26

2.2 Research approach ... 27

2.3 Research method – a case study ... 27

2.3.1 Selecting the cases ... 28

2.3.2. Preliminary investigations ... 28

2.3.3. Data Collection ... 29

2.3.4. Data analysis ... 30

2.4 Assumptions ... 30

2.6 Research quality ... 31

2.6.1 Reliability ... 31

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2.6.2 Validity ... 33

3. Theoretical framework ... 35

3.1 SECA –effects on the shipping industry ... 35

3.1.1 Fuel prices ... 35

3.1.2 Modal shift ... 37

3.2 Slow steaming ... 41

3.2.1 How widespread is slow steaming today? ... 41

3.2.2 How will ship operators be affected by slow steaming? ... 43

3.3 Calculations ... 47

3.3.1 Fuel consumption ... 47

3.3.2 The effects of slow steaming on fuel cost ... 48

3.3.3 The effect of slow steaming on lead time ... 50

4. Case study ... 51

4.1 Slow steaming’s effect on fuel cost ... 51

4.1.1 Andromeda J – fuel cost ... 51

4.1.3 Nordic Bremen – fuel cost ... 56

4.2 Slow steaming’s effect on time schedule ... 60

4.2.1 Andromeda J – schedule ... 60

4.2.2 Nordic Bremen – schedule ... 60

5. Analysis and discussion ... 62

5.1 Implications of the 2015 SECA regulation ... 62

5.1.1 Risk of modal shift ... 62

5.1.2 Other stakeholders ... 63

5.2 The container segment ... 63

5.3 Slow steaming ... 63

5.4 Determining fuel consumption ... 64

5.5 The empirical results ... 65

5.5.2 Fuel cost analysis ... 66

5.5.3 Lead time analysis ... 67

5.6 Interpreting the results ... 68

6. Conclusion ... 69

7. Further research ... 70

8. References... 71

9. Appendix ... 79

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List of figures

Figure 1: Map over the European SECA ... 12

Figure 2: LNG, HFO and MGO prices (2006 – 2012) ... 17

Figure 3: Price development of methanol (MeOH), HFO (IF380), and MGO (2008 – 2013) ... 19

Figure 4: Historical prices in $/ton of HFO (LS380), MGO, LNG and Brent Oil (2001 - 2011) ... 36

Figure 5: Predicted price development for high and low sulphur fuel 2010 to 2025 ... 37

Figure 6: Cost structure container ship (600-2000 TEU) ... 45

Figure 7: Image of Andromeda J ... 52

Figure 8: Fuel cost curve Andromeda J (full two-week route) ... 53

Figure 9: Image of Nordic Bremen ... 57

Figure 10: Fuel cost curve Nordic Bremen (full two-week route) ... 57

List of tables

Table 2: Effect of the estimated fuel price increase on freight charges ... 39

Table 3: Combination of slow steaming, and full load steaming ... 41

Table 4: Typical engine load for slow steaming vessels (percentages) ... 42

Table 5: Two-week sailing route for Andromeda J ... 52

Table 6: Fuel cost scenarios for Andromeda J (full two-week loop) ... 54

Table 7: MGO price’s impact on speed, Andromeda J ... 55

Table 8: Two-week sailing route for Nordic Bremen... 56

Table 9: Fuel cost scenarios Nordic Bremen (full two-week route) ... 58

Table 10: MGO price’s impact on speed, Nordic Bremen ... 59

Table 11: Time increase Andromeda J ... 60

Table 12: Time increase Nordic Bremen ... 61

Table 21: Case summary, full two-week route ... 66

Table 13: Typical energy content of selected fuels ... 79

Table 14: 10 day price average for marine fuel (April 2013) ... 79

Table 15: Price per ton prediction for maritime fuel from 2014 to 2017 ... 79

Table 16: Andromeda J vessel specifications ... 80

Table 17: Nordic Bremen vessel specifications ... 80

Table 18: Operation speed at sea, recordings for Andromeda J ... 80

Table 19: Operation speed at sea, recordings for Nordic Bremen ... 81

Table 20: Andromeda J, time in port ... 81

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Abbreviations

HFO Heavy fuel oil, a.k.a. bunker oil

ISL Institute for Shipping Economics and Logistics (German) LNG Liquefied natural gas

MGO Marine gas oil MDO Marine diesel oil

IMO International maritime organization NM Nautical miles

PM Particular matter

SECA Sulphur emission controlled area

TEU Twenty foot equivalent unit

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1. Introduction

In 1999 a decision was made that would prove to have dramatic consequences more than a decade later. The decision was made by the Council of the European Union in collaboration with the European Parliament and the European Commission, and was named Directive 1999/32/EC (EU, 1999). The Directive, which has been amended in 2005 and 2012 and today named Directive 2012/33/EC (EU, 2012), addresses the issue concerning sulphur, or more precisely the sulphur content in marine fuels.

The most common type of marine fuel used in shipping has up to this point been bunker oil, or Heavy Fuel Oil (HFO). HFO is a residual oil that comes from distillation and/or the cracking system of natural gas processing (Intertek, 2011). HFO naturally contains a small amount of sulphur that during combustion in ship engine is emitted into the air as Sulphur Oxide(s) (SOx). One of these sulphur oxides is sulphur dioxide (SO

), which for long has been recognised as a major cause of acidification, or so called acid rain (Europa, 2007).

Acidification is known to lead to a decline in aquatic ecology e.g. fish populations, and forest and terrestrial ecosystem damage (Encyclopedia of Environment and Society, 2007). Other effects associated with sulphur emissions are for example heart disease, lung cancer, and chronic bronchitis for adults, or acute respiratory infections for children (Castanas et al., 2008).

In an attempt to reduce the negative consequences associated with sulphur emissions, a Sulphur Emission Control Area (SECA) have been implemented in Northern Europe. The European SECA includes the Baltic Sea, the North Sea and the English Chanel. Directive 2012/33/EC regulates the amount of sulphur permitted in marine fuels within the SECA and as of January 1st 2015, the maximum limit is set to 0.1 %, compared to the current (2013) limit of 1.0% (EU, 2012).

In order to comply with the maximum limit of 0.1% sulphur content, ship operators are more or less forced to switch to other types of fuel, as it is not economically viable to de-sulphur HFO to a 0.1% sulphur content (SWECO, 2012). There are different fuel alternatives available, e.g. LNG and Methanol, but the perhaps most obvious alternative is changing from HFO to Marine Gas Oil (MGO) as very little engine modifications are required. MGO is however substantially more expensive then HFO due to higher manufacturing costs (Ministry of Transport and Communications Finland, 2009) and, as fuel often represents the largest single cost (Delhaye et al., 2010), and changing from HFO to MGO will in most cases result in a significant negative economic impact for a ship operators.

The increased fuel cost due to the 2015 SECA regulation must be managed somehow in

order to not lose customers. The purpose of this thesis is therefore to investigate whether a

reduction of operating speed, also referred to as Slow Steaming (SS), could be an

appropriate method to compensate for the increased fuels costs imposed when switching

from HFO to MGO

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1.1 Background

Before commencing to define today’s challenge for shipping companies imposed by the 2015 SECA regulation, this section will describe relevant background information to assist the reader in understanding the context for this thesis and in getting a better understanding of the impact of shipping in the world. Only by recognizing the importance of shipping, is it possible to understand the broader impact of the SECA regulation.

1.1.1 The shipping industry

Shipping, although perhaps not entirely understood by the main public, plays a crucial role in the global infrastructure (Bardi et al., 2006). Even when looking back 5 000 years, shipping has been in the forefront of economic development and have remained a key aspect ever since (Stopford, 2009). The oldest evidence of shipping activities goes back 5 000 years to the time of Babylon, where a sea trade network between Mesopotamia, Bahrain and the Indus River was developed (Stopford, 2009). The first shipping routes used rivers and coastal sea ways to utilize trade with other communities within the region.

Going forward 2 000 years, to 1 000 B.C., sea traders had started going over open sea, e.g.

across the Mediterranean Sea, as well as travelling over longer distances, further enabling trade with more distant regions (ibid). Continuing to the 15

century Portugal became the pioneering state that started the phenomenon of global trade with Columbus discovery of the Americas in 1492 and by Vasco De Gama’s discovery of the sea route to India sailing around the Cape of Good Hope in 1497 (ibid). The main purpose for these expeditions was economic, or more precisely to gain direct access to the lucrative spice and silk trade from the Far East (ibid). As an example of the benefits associated with having direct access to the Far East, Vasco De Gama returned from India with the information that the pepper, usually purchased in Venice for 80 ducats, could be purchased in Calicut for 3 ducats.

Portugal continued its exploration and, followed by other European nations such as the Netherlands and England, had established trade networks to all parts of the globe within two decades after Columbus reached the Americas (ibid).

Although development in shipping technology evolved over time and became more and

more sophisticated it was not until the middle of the 20

century that shipping really had its

strongest impact on the global economy, with the introduction of the modern container.

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1.1.2 Containerization

“The handling of cargo on the waterfront between the land and the ship is about the most horrible example of material handling that the world have ever seen and the use of containers appear to be about the best prospect for improving this problem” – Francis G.

Ebel

1960 (Van Ham & Rijsnebrij, 2012, p.40).

During history goods were more or less always loaded and unloaded in individual units, e.g.

in barrels, sacks and wooden crates, a process that was both slow and labour intensive. In fact often two thirds of a ship’s productive time was spent in port, with the result of port congestion and low levels of ship utilization (Bernhofen et al., 2013). But in 1955 a trucking entrepreneur from the USA named Malcolm P. McLean acquired a steamship company with the idea of transporting entire truck trailers on board a ship (World Shipping Council, 2013a).

A year later, in 1956, the first container ship, named the Ideal X, made its maiden voyage loaded with 58 metal containers between Port Newark and the Port of Houston. This marked the start of what would become a revolution in the shipping industry, enabling ships to be loaded and unloaded much quicker and thus much more cost efficient (Bernhofen et al., 2013). It should be mentioned that other tests using what could be called containers had occurred prior to McLean’s premier voyage, however none did prove to be a commercial success (cf. Levinson, 2006; Yukon Museum, 2012). As a consequence of the introduction of the container other important technical developments shortly followed, further increasing productivity. An example is purpose built container cranes capable of handling 400 tonnes of goods per hour increased the average productivity 40 times compared to when using manual labour (Levinson, 2006).

Five years after the first container voyage had taken place the International Organisation for Standardisation, ISO, set standards for container sizes in 1961 (World Shipping Council, 2013b). The two most common types of containers was the 20 foot container and the 40 foot container, both remaining the most commonly used types of containers even to this day (ibid). Standardising the sizes of a container enabled other modes of transport, i.e. rail and road, to adapt its wagons and trailers to accommodate the standard containers and thus enabling the concept of intermodal transport, resulting in a much more efficient supply chain (cf. Levinson, 2006). In essence, the introduction of the container did not just revolutionise shipping but rather it changed the way transport in general was organized as well as utilizing economies of scale and greatly reduced the costs of international trade and increased the speed of the supply chain (Levinson, 2006). It should perhaps be mentioned that some economists argue that the rapid global economic development seen during the second half of the 20

century would have occurred regardless of the introduction of the container (Krugman, 2001).

1 Francis G. Ebel was one of the co-authors who received the Society for Naval Architects and Marine Engineers VADM Cochrane Award in 1962 for the best peer-reviewed paper (SNAME, 2011).

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Containerization is commonly regarded to have had the largest impact on consumer goods and commodities, with the transportation cost of container shipping regarded to be approximately 1 % of a commodities retail price (Roland, 2007). In 2009 approximately 90 % of all non-bulk goods were transported in containers stacked on transport vessels (Ebeling, 2009).

To put that in numbers, and to get a better understanding of the impact that the introduction of containers had on global trade, in 1960, 307 tonnes of non-bulk cargo was transported on ships. In 2004 that number was 2 855 tonnes (Hummels, 2007), an increase of over 900 %. During 2011 approximately 3 706 million tonnes of goods where transported to and from the EU27 ports (Eurostat, 2013). When including inland waterways, 520 million tonnes of transported goods have to be added (Eurostat, 2013), resulting in over 4 200 million tonnes of goods being transported by ships to, within and from the EU27 states during 2011.

The first container vessel loaded, as previously mentioned, 58 containers. The largest container ships currently have a capacity of over 16 000 TEU’s and during 2013 Maersk will own the largest ship in the world, a container ship with a capacity of 18 000 TEU’s (Maersk, 2013a).

As with all other things there is of course a back side to all things good and for shipping one of the major problems is air pollution.

1.1.3 Sulphur emissions

Sulphur is a natural element that exists in abundance on our planet, and is an essential component of all living cells (TSI, 2013). It is, in its native form, a non-metal solid yellow crystalline and is both tasteless and odourless (Lenntech, 2013). Sulphur can also exist in the form of different derivatives such as sulphide and sulphate minerals, and different sulphur oxides, commonly referred to as SOx. The most common sulphur oxide is sulphur dioxide, or SO2 (Lenntech, 2013). In regards to shipping, sulphur naturally exists in fossil oil, the basis for HFO and MGO, in the form of hydrogen sulphide (TSI, 2013). When the fuel is combusted in the ship’s engine sulphur is released into the atmosphere in the form of sulphur oxides, i.e. in gas form, and sulphate, i.e. in solid form (Diesch et al, 2012).

When released into the atmosphere some of the sulphur oxides reacts with water vapour and oxygen in the air and transform sulphuric acid. The emitted sulphate, i.e. particulate matter, travels with the wind to e.g. habituated areas where it risks being inhaled by humans (Encyclopaedia of Environment and Society, 2007).

Sulphuric acid is a highly reactive and corrosive substance (NPI, 2013), that in nature cause a phenomenon called acid rain (Länsstyrelsen, 2013). Acid rain is known to cause e.g.

corrosion of buildings in urban areas, forest damage as well as acidification of lakes, rivers,

groundwater and land soil (Encyclopaedia of Environment and Society, 2007). Acidification

occurs when soil or water bodies start to lose its capacity to neutralize or resist acidifying

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atmospheric depositions, e.g. sulphuric acid, (Ministry of Transport and Communication Finland, 2012). If the acid deposition rates exceed the tolerance level of a specific water or soil body, the local ecosystem may lose its entire neutralizing capacity (ibid).

A consequence of ecosystems losing its capacity to neutralize atmospheric depositions can be declining fish stocks in the affected water bodies and depletion of nutrients in the soil (Encyclopedia of Environment and Society, 2007). One of the most harmful consequences of acidification, from a human perspective, is that in acidic conditions aluminium and heavy metal ions, all very toxic (Ministry of Transport and Communication Finland, 2012), are more easily rinsed out of the soil and instead becomes absorbed by living organisms (ibid), e.g.

animals, plants and trees and from there to humans when consuming these as food (cf.

Encyclopedia of Environment and Society, 2007).

Sulphuric substances, both SOx and sulphates, have, to mention a few, been documented to have the following effects on human health:

• Neurological effects and behavioural changes

• Disturbance of blood circulation

• Heart damage

• Effects on eyes and eyesight

• Reproductive failure

• Damage to immune systems

• Damage to liver and kidney functions

• Disturbance of the hormonal metabolism

• Suffocation and lung embolism

(Lenntech, 2013; Encyclopaedia of Environment and Society, 2007)

It is further estimated that the air pollution caused by ships running on high sulphur fuels is causing 50 000 premature deaths in Europe every year (Euractive, 2012). Most of these consequences have been known for several decades, and have been addressed by policy makers in different ways and different stages. The SECA regulation is how the EU has chosen to address the problem of pollutants associated with emissions from ships.

1.1.3 EU directives

In order to get a better understanding of Directive 2012/33/EU, and the context in which it was conducted, it is necessary to go back all the way to 1975 and to Directive 1975/716/EEC.

This directive addresses the approximation of the laws of the member states relating to the

sulphur content in certain fuels (EU, 1975). In essence, it states that the content of sulphur in

common fuel types has to be reduced in a progressively and significantly way, due to the

negative effects sulphur emissions has on human health and on the environment (ibid). In

1993, and to Directive 1993/12/EEC, the Council of the European Communities published

Directive 1993/12/EEC with the purpose of regulating the sulphur content in certain liquid

fuels used within the European Union (EU, 1993). In essence the directive set forth to

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regulate the maximum permitted sulphur content in gas oil to 0.2% as from 1 October 1994 and to 0.05% as from 1 October 1996. This includes fuel used for maritime applications in general, although it does not include HFO.

Bunker oil, HFO, is addressed in the Directive 2012/33/EC, but instead of stating specific EU regulations, the directive refers to the MARPOL convention 73/78, imposed by the International Maritime Organization (IMO), and to the corresponding revised Annex VI regulation. IMO a United Nations branch dedicated to the safety and security of shipping and the prevention of marine pollutions by ships (IMO, 2013). The area affected by Directive 2012/33/EC, is as the Baltic Sea, North Sea, and the English Channel. As seen in Figure 1 below, there are countries with coastline only within the controlled area, which does not have any possibility to redirect their shipping flows to avoid this area, without going through another country.

Figure 1: Map over the European SECA

Source: Jernkontoret,2013.

Since the competitiveness of the shipping industry risk getting negatively affected by increased fuel prices, Directive 2012/33/EU, stipulates that state aid will be allowed to reduce the risk of a modal shift. The ceiling size of the state aid in any maritime investment is set to a maximum of 30 % of the total investment, given that the investment helps promoting short sea shipping (EU, 2004). The type of aid can according to the guidelines be both tax reductions and/or direct payments (e.g. reimbursement of seafarers’ income tax).

Both options are possible due to a lack of harmonization of fiscal systems among since

Member States. This opens up for an opportunity for ship owners to seek funding from local

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governments when investing in new and green technology, which was the case when Viking

Line recently built M/S Grace, a passenger ferry operated on LNG (liquefied natural gas). The

ministry of Transport and Communication in Finland granted Viking Line €28 M to help

finance the build (Viking Line, 2013). But due to the considerable size of the grant, the

European Commission did also need to examine and approve the grant, which they did in

2012 (LVM, 2012). This type of aid might be necessary for the shipping industry, to

financially coop with the investments that many of the alternatives to comply with the

regulations require. The following chapter will present some alternatives that are more or

less available today, and where state aid definitely could affect the outcome of the decision.

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1.2 Alternatives to comply with the SECA regulation

In order to evaluate the pros and cons of slow steaming, other alternatives need to be discussed. This presentation is intended to give an overview of the most discussed ways to comply with the stricter sulphur regulations, with the pros and cons of each alternative. This discussion will later be used as background to understand why it is interesting to investigate slow steaming.

1.2.1 Low sulphur fuel

To comply with the 2015 SECA regulations without having to do any significant adjustments to either the ship or the engine, operators can switch from the heavy fuel oil (HFO) with 1%

sulphur that is used today, to a lighter bunker fuel with 0.1% sulphur, e.g. marine diesel oil (MDO) or marine gas oil (MGO). These fuels share similar characteristic and price, but henceforth, MGO will be the focus. The obvious advantage of this alternative is that no large investments are needed; since most ship engines can switch from HFO to marine diesel with only small modifications (Pahlm, 2013). The cost for lubricant oil will however increase, since lighter fuels do not have the same lubricating properties as HFO (Pahlm, 2013). But the main drawback is that the price per tonne is higher for MGO than for HFO. A general rule is that the cleaner the fuel, i.e. lower sulphur content, the higher the price is (SWECO, 2012). The price for marine fuel with 0.1% sulphur content is estimated to be around 40-60 % higher than the price for HFO (Purvin & Gertz, 2009; Rexius, 2013). Predicted price development will be covered more in detail in chapter 3.1.1 “Fuel prices”. Whether ship operators choose to switch to a lighter fuel depends, consequently, on if they can bare the higher cost. If the price difference is too large, other solutions must be considered.

For the later investigation on the possibilities of slow steaming, it will be done for ships running on MGO. The other alternatives in this section are here considered as alternatives to slow steaming on MGO, even though slow steaming very well can be applied on any alternative. But the intention of the thesis is to find an alternative that does not need the large investments associated with following alternatives.

1.2.2 Exhaust cleaning systems and heavy bunker fuel

Heavy bunker fuel (HFO) can still be used after the new regulations if an exhaust cleaning system is used, given that the cleaning system complies with the sulphur limits set in the MARPOL convention Annex IV (IMO, 2005). These systems are often referred to as scrubbers, and the idea behind the technology is to decrease the sulphur amount in the exhaust gas. This can be done by running the exhaust through water (wet scrubbing), or running it through calcium materials (dry scrubbing) (EGCSA, 2013).

Wet scrubbing systems can use either salt water or fresh water with sodium hydroxide

added (EGCSA, 2013; Finnish Ministry of Transport and Communication, 2009). The salt

water system is an open system where water is pumped in from the sea, circled through the

system to clean (scrub) the exhaust and then pumped back into the sea (ibid). Before being

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pumped back into the sea, it needs proper treatment to remove pollutants, to comply with the IMO (2009) wastewater regulations.

The freshwater system is a closed system which stores the residues on-board and require transport to land facilities for disposal (Delhaye et al. 2010). Dry scrubbing systems use calcium to absorb the sulphur in the exhausts, and the residues are, like a closed wet scrubber, stored on-board (SWECO, 2012). Both technologies are well used by land-based industries that do not have the same space requirements (AEA, 2009), but it has been problematic to transfer the technology to the shipping industry (SWECO, 2012).

The cost of installing a scrubbing system depends mainly on two factors, if the system is installed on a new ship or retrofitted on an existing ship, and if it is an open or a closed system. The technical consultancy company AEA have in their report to the European Commission (2009) summarized the costs for installing and using scrubbers (Table 1). A retrofitted open system wet scrubber will cost about €2.30M to install, and a retrofitted closed wet scrubber about €4.59M, the corresponding annual costs are €301 000 and

€708 000. Green Ship (2012) has together with Alfa Laval Aalborg estimated the cost for a retrofitted closed system to about $5.8M, which is close to AEA’s estimation. The main difference between running a closed and an open scrubbing system is the operation and maintenance costs (O&M), where waste disposal from the closed systems, inter alia, are included.

Table 1: Scrubber costs

Tech spec Investment

[K€/vessel] Lifetime

[years] O&M

[K€/vessel] Fuel cost

[K€/vessel] Annual cost [K€]

New open 1 148 15 28 41 167

New closed 2 296 15 198 41 441

Retrofit open 2 296 12.5 28 41 301

Retrofit closed 4 592 12.5 198 41 708

Source: AEA (2009)

The biggest issues according to studies of this technology have been space requirements, waste disposal, and reliability (Finnish Ministry of Transport and Communication, 2009;

SWECO, 2012; AGS, 2007). The on-board facility requires a significant amount of space, which decreases the goods capacity (SWECO, 2012), and could consequently affect revenues. The problem with waste disposal differs depending on what system being used.

Open wet scrubbers need to have a purification plant, which requires more space and

separate handling of the residue in the ports (AGS, 2007). The filtered wash water could

however still affect the sea, especially semi-confined areas such as ports, and further studies

need to be done on the effects of released water (ibid). The wash water is regulated by the

IMO (2009) in Resolution MEPC 184(59), where limits are set for pH-level, hydrocarbons

(PHAs), nitrates, and particulate matter (PM). Dry scrubbers and closed wet scrubbers

require both on-board handling and port handling of the waste, but the logistics of the port

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handling is still under development (Finnish Ministry of Transport and Communication, 2009).

The academic opinions about scrubbers as an alternative to comply with the 2015 SECA regulations are fairly consistent. SWECO (2012) establishes in a report that the technology is still too unreliable with too high failure frequency, and that manufacturers only guarantee the cleaning level but not that the system will operate error-free. While still predicting a rapid increase in installations of scrubbers if ship operators cannot handle the price difference between high and low sulphur fuel in 2015, but believe in a decrease if operators can manage the cost of low sulphur fuel. The German maritime research institute ISL (2010) excluded scrubbers as a viable option in its report of the impacts of the new regulations, due to the technology still being in a testing phase. It is considered too unreliable to make any conclusions regarding the sustainability of scrubbers with the small number of ships using the technology at the time of writing the report. ISL also states that the residues from the scrubbers are often dumped into the sea, instead of delivered to toxic waste disposal companies in ports. The Finnish Ministry of Transport and Communication (2009) point to that the size of the equipment is the greatest challenge, since efficiency and size is said to be proportionately related, and that installation of scrubbers on old ships will be a difficult task due to the ship design. Nikopoulou (2008), a Chalmers researcher, do however call sea water scrubbing a promising technology, disregard of the environmental problems of wash water, and a relatively long investment payoff time.

1.2.3 LNG

Liquefied natural gas (LNG) is an alternative fuel that does not emit any sulphur at all, and which also have lower CO2 emissions compared to HFO and MGO (Danish Maritime Authority, 2012). This makes it a promising long term alternative for ship operators, but there are some short term issues. LNG has been a hot topic the last couple of years, primary as a green solution. Vessels operated purely on LNG are not widespread today, but there are boats running on LNG, and more are being built (ibid). In 2012, there were 23 LNG ships in the sulphur controlled area, and 22 of these ships sailed in Norway (SWECO, 2012). A ship build that has been well noted within the shipping industry since 2011 has been the build of Viking Lines’ first LNG passenger ferry, which made its maiden voyage between Stockholm and Åbo in January 2013 (Viking Line, 2013b). Viking Grace, as it was named, is the first large scale ferry operated on LNG and is said to be one of the most environmental friendly ships built (LNG World News, 2013).

The price for LNG fuel is today the other main advantage of this alternative, compared to

MGO or HFO. It is fixed relative to the pipeline gas, which usually follows the trends of HFO

and other oil products (Danish Maritime Authority, 2012). The energy content of LNG differs

from the energy content of HFO and MGO (see Table 13, Appendix, for values), price

comparison between LNG and oil products are therefore usually not made in USD per ton,

but instead USD per Propulsion power (mmBT) (GasNor, 2012). As shown in Figure 2 below,

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LNG had a lower correlation to HFO and MGO the second half of the 2000s, but has followed the trend of HFO and MDO more closely since early 2009. The price development is however uncertain, and payoff time on an LNG investment will vary with the price spread.

Figure 2: LNG, HFO and MGO prices (2006 – 2012)

Source: MAN, 2012a

The cost and environmental advantages of LNG are superior to both HFO and MGO, but it comes at a price. New build LNG ships are more expensive than regular ships; the Swedish gas company SGC estimates a cost increase of between 5 – 50%, where figures in the higher end are more likely (SGC, 2011). It is also said in the same report that retrofitting existing ships into LNG ships is unlikely, since the costs are too high. Green Ship (2012) has together with MAN Diesel and Turbo made an estimation that a retrofitting of an old HFO engine to a LNG engine would cost around $7.5M. The German Institute for Shipping Economics and Logistics (ISL) (2010) concludes in a report that there would be too little time to amortise new LNG engines if installed on old ships. ISL also states that the size of the LNG tanks makes retrofitting difficult, since it requires being up to four times larger than HFO tanks (ISL, 2010).

SWECO assumes that 2% of the ships within the controlled area will be LNG ships in 2015, which is in accordance with a normal phasing out time of old ships. SGS (2011) states that almost 20% of the ships within the controlled area today are 30 to 40 years old, and thus needed to be replaced before 2020, making room for a potentially larger increase in new build LNG ships.

Another concern with LNG operated ships today is the infrastructure for the fuel. The bunker

oil used today is provided to ships through an effective infrastructure, with tanks in ports,

bunker ships and out on barges (Danish Maritime Authority, 2012). The same infrastructure

does not exist for LNG and ships that burn LNG have to have temporary solutions for

bunkering the LNG (SWECO, 2012). The reason for this are the specific characteristics of LNG,

to keep it liquefied it needs to be kept at -163°C, and in gas form the volume is 600 times

larger than when in liquid form (Business Region Goteborg, 2012). The Danish Maritime

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Authority (2012) have in a large EU funded project, together with other Nordic authorities and several actors from the gas and shipping industry, extensively investigated the feasibility of a LNG filling station infrastructure. The recommendation is that larger port with enough space, and with heavy traffic or where short turnaround time is important, should invest in LNG terminals with pipelines to the ships. Smaller ports with less traffic can use ship-to-ship or truck-to-ship solutions. The situation is called a chicken-and-egg problem in the report, since LNG providers are not willing to make the investments without sufficient demand, and ship operators are not willing to invest in LNG ships if the infrastructure is not in place. The safety risk factor of LNG is also something that has been debated (cf. Danish Maritime Authority, 2012; Vanem et. al, 2007), but the safety risk factor of the different alternatives is excluded in the evaluations in this thesis.

1.2.4 Methanol

Methanol is another alternative, which is not as frequently mentioned alternative as LNG and scrubbers, but still interesting to mention since one of Sweden’s largest shipping companies, Stena Line, has decided to switch to methanol for their vessels (NyTeknik, 2013;

Sjofartstidningen, 2012; Ullstrand, 2013). The decision to go with methanol was the result of a two-year research collaboration between several companies from the shipping industry (e.g. Wärtsilä, SSPA and Lloyd’s Register), with the intention to find concrete solutions to reduce the energy consumption within the shipping industry (Business Region Goteborg, 2012; Sjöfartstidningen, 2013). Methanol was seen as a more realistic alternative for direct implementation, than for example LNG, since the existing infrastructure with tankers and fuel stations can be used (NyTeknik, 2013). Stena Line seems to be the only shipping company currently looking at this solution (ibid). Stena Lines first tests with methanol on auxiliary engines are scheduled in 2013, and if the results are positive, the intention is to have the first passenger ferry running solely on methanol in 2014, followed by conversions on 24 of the 35 ships in Stena Lines fleet the next few years (ibid).

The main difference between LNG and methanol is that LNG needs to be kept at -163°C to

be liquefied, and methanol is liquefied at room temperature (ibid). This gives methanol the

clear advantage of using the existing infrastructure, which LNG cannot use. Methanol does

however have lower energy content than LNG, (thus also HFO and MGO, see Table 13,

Appendix), which means that larger volumes are needed, i.e. larger fuel tanks. The price of

methanol have followed the price of HFO, but have the last two years been traded slightly

higher, but still lower than MGO, see Figure 3 below.

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Figure 3: Price development of methanol (MeOH), HFO (IF380), and MGO (2008 – 2013)

Source: Wärtsilä, 2013.

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1.3 Problem description and analysis

With the background and the different alternatives in mind, this chapter presents an analysis of why these factors have led the authors to the research question. It includes an analysis of the SECA regulation and the challenges it presents, a brief presentation of slow steaming, and a discussion about why it is interesting to analyse slow steaming as a substitute to the other alternatives.

1.3.1 The SECA regulation; a challenge

First and foremost, it is important to establish that the SECA regulation is not a problem in itself, but a solution to the problems associated with sulphur emissions from ships. However, the implementation of the regulation imposes a huge challenge for shipping companies operating in the emission controlled area. An important factor to understand why operators consider it challenging is that, according to managers from the industry (Boliden, 2013;

Rexius, 2013; Ullman, 2013), the problem is not only the increased costs due to more expensive fuel, but also that they were not prepared for an implementation date this close to the decision date. The 2015 SECA limit of 0.1% was definitely decided by the EU in the summer of 2012, giving ship operators two and a half years to adjust to the new conditions.

But as can be seen from the process leading up to Directive 2012/33/EU, it can be argued that it should not have come unexpected. It was however still believed that operators would be given more time to adapt to such a significant decrease in fuel sulphur level (ibid).

The relatively short time from decision to execution is regardless forcing ship operators to quickly develop and implement viable solutions. As have been discussed in the previous chapter, much of the research in alternatives that complies with the 2015 SECA regulation are still in the introduction phase, and/or demand large scale investments. Both these problems would decrease if the time to implementation was longer, since it would reduce the risk of unexpected economic outcomes due to uncertain technologies and forced premature large scale investments. Time horizon for technology investments is a well- studied academic field, and a key factor according to many studies is timing (cf. Husimen, 2001). If the timing is not right for a large scale investment, chances are that the company cannot afford the investment, and state aid is neither guaranteed nor certain to be large enough. To phase out the whole fleet until 2015 is obviously not an economically viable option for a large shipping company. Based on the life expectancy of a ship, which differs from around 25 years for tankers and dry bulk ships, to around 30 years for passenger ships (Stopford, 2009), it would take at least 25 years to completely phase out an entire fleet.

1.3.2 SECA and fair competition

Another concern with the SECA regulation regards to unfair competition, partly within the

European shipping industry, but mainly for shipping as a transport mode in comparison to

other modes (i.e. road and rail). Since the controlled areas do not include the whole

European coast line, shipping companies operating in controlled areas will face a tougher

economic situation than companies operating south of the controlled areas. This will create

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an uneven advantage for shipping companies operating in Southern Europe, compared to the operators active in Northern Europe. Shipping as a mode of transport, and short sea shipping in particular, could also face decreased competitiveness in relation to other modes.

At the same time, the EU’s Marco Polo Programme is promoting a modal shift from land transport to short sea shipping in order to reduce road congestion and emissions (EU, 2003).

The SECA regulation is from this perspective somewhat contradictive to the Marco Polo Programme. To solve this problem with state aid for investments in new technology, as suggested by the EU, is not a long term solution to the problem, nor is it a reliable solution for ship operators.

The result of increased prices could be a shift from shipping to other modes of transport. If a shift would occur, it is likely to assume that it would differ between different shipping segments, and on different routes. A mode shift due to increased shipping prices would be more likely in industries where transportation constitutes a large share of the total cost (i.e.

low value per kilo), compared to industries where shipping only constitutes a small share of the total cost (i.e. high value per kilo). It might also be more likely on routes where there are several other modes to choose from (e.g. Gothenburg – Malmö), compared to routes where there are fewer viable options (e.g. Stockholm – Helsinki). If prices increase and the shipper cannot find another alternative, there is also a risk that the operations have to move to other locations. The Swedish melting company Boliden, which are very dependent on dry bulk shipping in the Baltic Sea, discusses this as a potential outcome of SECA. According to Boliden’s Head of Logistics Karl-Owe Svensson (2013), very concerned about the possible competitive disadvantage, in relation to melting companies in other parts of world, which Boliden would experience with increased transportation costs. More on the risks for modal shift is discussed in chapter 3.1.2.

1.3.3 Ship operators must take action

Regardless whether the 2015 SECA regulation is unfair from a competitive perspective, or the time to adapt is too short, the ship operators must take action. To summarize the alternatives discussed earlier, operators can;

• switch to marine gas oil (MGO),

• continue using HFO but installing exhaust gas cleaning systems (scrubbers),

• switching to natural gas engines (LNG),

• or switching to methanol.

The investment costs for switching MGO is limited compared to switching to scrubbers, LNG or methanol, but the fuel price is on the other hand higher (Danish Maritime Authority, 2012).

An option to compensate for increased fuel prices is to adopt operational improvements to reduce the fuel consumption. Reducing the speed, i.e. slow steaming, is one example of this.

Slow steaming is a well-known concept within the shipping industry, and is simply based on

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sailing the ships with reduced cruise speed. The reason why slow steaming reduces fuel consumption is that the relationship between speed and fuel consumption is not linear and small decrease in speed results in a relatively larger decrease in fuel consumption. This means that the total amount of fuel consumed on any give trip will be less if the speed is reduced, even including the extra voyage time required. The method is today primarily used during economically tough times, to cut costs when demand is low and capacity is high (Ullman, 2013; Sjöberger, 2013; Askola, 2013). It is therefore interesting to investigate if the economic situation with the new sulphur limits could be considered as “a permanent tough time”, and consequently examine if slow stem could be used as a solution to cut costs, even with high demand. The concept of slow steaming will be more developed in the theoretical framework.

What makes this sub-alternative interesting to investigate is that it does not demand any

machinery investments, and it does not have the same uncertainty as new technology or

relying on state aid. It is also relatively easy and fast to implement for the operators, and it is

possible to estimate the economic effects with rather good precision. To reduce fuel

consumption also makes this alternative sustainable from an environmental aspect, even

though other alternatives such as LNG will be environmentally superior when/if the

infrastructure problem is resolved.

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1.4 Purpose

With the background and problem analysis in mind, the purpose of this thesis is to investigate to what extent the increased fuel costs from using low sulphur fuel (MGO), imposed by the 2015 SECA regulation, can be compensated for by using the concept of slow steaming. The intention is to determine whether slow steaming by itself compensates enough for increased fuel costs by reducing fuel consumption, or if other solutions are needed to prevent, in the end, a cost increase for shippers. Slow steaming is as mentioned a well-known concept within the shipping industry, but does it have more potential than today’s usage? After applying the concept on two cases, by analysing the potential fuel consumption, fuel cost, and time tables, it will be possible to answer the research questions below. It will also be possible to determine, from the operators perspective, if it possible to compensate for the increased fuel price by reducing the speed.

The result is intended to give the industry an indication to whether slow steaming could be a long term solution. But the thesis is also intended to be a starting point for continued research on slow steaming, since this thesis will not be able to cover all segments, ship sizes or trip distances. The calculation model used to analyse slow steaming in our cases will be applicable to any segment, ship size or trip distance due to its generality and possibility to change the input data. Hence, the thesis could hopefully be used as a framework for continued analysis of the possibilities of slow steaming.

1.5 Research question

The main research question is complemented by two sub questions below, all three questions will be answered quantitatively in the case study, with a qualitative reasoning about the result in the analysis.

Main research question

 To what extent can slow steaming be used to compensate for the higher fuel cost from using low sulphur fuel (MGO), imposed by the 2015 SECA regulation?

Sub questions

 What speed is the break-even point between today’s speed with HFO, and slow steaming with HFO, and is possible to reduce to this speed?

 How will the increased lead time affect time schedules?

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1.6 Limitations

It has previously been touched upon what the purpose of this thesis will be. Some areas that will not be covered have been mentioned, and this chapter will further explain the scope of the thesis.

As the main research question implies, the intention is to investigate to what extent slow steaming can be used to compensate for increased fuel costs imposed by stricter sulphur regulations, given that light fuel oil, i.e. MGO, is used. A presentation of other alternatives to comply with the 2015 SECA regulation have been included in order to provide a framework in the discussion about why slow steaming is an interesting alternative, however these alternatives are not further discussed in this thesis.

Geographical limitations

There are sulphur emission controlled areas both in Northern Europe and in North America, the focus here will be on the European SECA, as defined in the revised MARPOL Annex VI convention, Regulation 14:3 (IMO, 2008), see Figure 1 in Chapter 1. In total there are about 14 000 ships that daily sail through or within the European SECA, 2200 of these ships are daily located within the area (SWECO, 2012). To evaluate a full implementation of slow steaming, it is of most interest to look at the 2200 ships that daily operate in the area, and preferably ships that only operate there. By choosing ships that only traffic the controlled area, it will be possible to disregard how much of the traffic that is actually affected by the regulation, since low affection will decrease the interest to make any large adjustments.

Type of ship and size limitations

The result of implementing slow steaming is likely to be different between ships of different size and type of operation, so one cannot draw any general conclusions about slow steaming based on conclusions from just one ship. This thesis will however not be able to apply slow steaming on a wide variety of ship sizes, nor a wide variety of ship types. The focus will instead be on implementing slow steaming on a selection of cases from the container segment. This decision is the result from consultations with professionals from the industry (Per Sjöberger, Swedish Shipowners’ Association; Gavin Roser, The European Freight and Logistics Leader Forum), who have given indications that the concept will be more easily implemented on this segment due to its characteristics. It is also of interest due to the importance of the segment to both the emission control area, and as discussed in the introduction, the global economy.

Container vessels with routs within the North Sea and Baltic Sea are usually smaller vessels.

These vessels can for example be working as feeder vessels in a larger transcontinental

transport system, being a link in short sea shipping systems, or being used where the

draught is restricted (Stopford, 2009). Vessels with a capacity of up to 499 TEUs are referred

to as feeder vessels, 500-999 TEU vessels are called feeder-max, and vessels with a capacity

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of 1000-3000 TEUs are referred to as handy vessels, which are still small enough to be used intraregional (ibid). The sizes of container ships that will be discussed in this thesis will be between 500 and 2000 TEUs, i.e. feeder-max and handy vessels.

Included actor

This thesis will focus on the ship operators, but other actors affected by the implementation of slow steaming might be mentioned in some discussions. This can be used to highlight where more research is needed, or to present a wider picture of how slow steaming can affect the shipping industry as such.

Factors needed for a full evaluation

To fully evaluate slow steaming as an option from the ship operator’s perspective, it is necessary to evaluate the following:

1. All factors affecting the total voyage costs (e.g. fuel costs, manning, insurance, maintenance, repair, administrative costs, etc.)

2. The changes in the operator’s supply (is more capacity needed?)

3. The change in the shippers demand (will shippers not accept longer lead times?)

4. The combined effect of 1), 2) and 3) on annual revenue.

This thesis is limited to calculating the fuel cost in 1), and not any other costs in 1) since

much of the data needed to calculate the other factors are internal company data. It has also

fallen outside of the scope of this thesis to make any predictions about changes customer

demand, or the operators supplied capacity.

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2. Methodology

This chapter is intended to clarify the methods used to answer the research question and come to the conclusions presented at the end of the thesis. This is an important step to give the reader an opportunity to validate the research, and draw own conclusions about the work and the conclusions. It also gives the authors an opportunity to criticize the methods, as well as the sources, used in the thesis.

2.1 Research design

The purpose of this thesis is to further contribute to the research regarding alternative methods for shipping companies to comply with the 2015 SECA regulation in a profitable way. By initiating research on the possibility of using the concept of slow steaming in combination with using MGO as a fuel, the aim is to try to establish whether it can be a solution worth pursuing.

It was early decided that the foundation of the research would be to establish a theoretical framework that would visualise how the total voyage cost would change for a given trip, sailed by a given ship at variable speeds while running on low sulphur fuel, i.e. MGO. This would then be compared to the current operating mode, i.e. current fuel and cruise speed, to establish at what cruise speed the break even cost would occur. Finally the theoretical framework would be tested on an actual scenario using actual ship data and actual routes.

This would be done by conducting a case study.

The theoretical framework in this thesis is based on a qualitative approach (Collis, 2009) and includes an extensive literature review as well as open interviews with experienced shipping industry representatives as foundation. A literature review can be regarded as a systematic process that serves the purpose of finding existing knowledge on a specific topic (Collis, 2009). Literature usually refers to all secondary data that could be beneficial for the research (Collis, 2009). However for this thesis the official EU documents, i.e. primary data (Collis, 2009) used for reference are included in the literature review.

The fuel consumption formula was attained after an open interview with Henrik Pahlm (2013), Associate Professor in Marine Machinery Systems at Chalmers Technical University, as well as by a review of relevant previous academic studies (Kontovas et al., 2011; Corbrett et al., 2009; Eide et al., 2009). The cost structure is based on several academic sources (Stopford, 2009; Delhaye et al., 2010; Copenhagen Economics; 2012) and is used to illustrate that fuel represents a large part of a container vessels daily cost, i.e. 47%, which is one of the factors making at suitable segment to research for this thesis. The theoretical framework was then used to calculate the fuel consumption for a selected ship at different cruise speed and compare the result with the fuel consumption when running at the ship’s design speed.

The results were then used together with fuel price data to calculate the fuel cost for

running at design speed using HFO and at variable speeds using MGO. This was used to

establish a breakeven point, i.e. at what cruise speed the fuel cost when running on MGO

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would equal the fuel cost when running on HFO at design speed. The result was then used for the case study.

2.2 Research approach

The theoretical framework will start by describing how the 2015 SECA regulation is viewed upon by different industry representatives and how it is regarded to affect the shipping industry within the emission control area. The first part of the theoretical framework is also used to present the predicted price development for marine fuels. This will be followed by a thorough explanation of the concept of slow steaming; how widespread it is, and how it affects the ship operators. In the section about how it affects ship operators, a deeper investigation will be made about how other costs besides fuel costs will be affected by slow steaming. All these topics are regarded as crucial in order to create a theoretical framework that corresponds well with existing research and industry knowledge. The model used to calculate the theoretical fuel cost will be presented in Chapter 3.3.

The intention is, as previously mentioned, that the model should be applicable on a wide variety of ships and type of operations, but the drawback of making a generic model is that it will not be possible to tell for which cases it works, and for which cases it does not work, without implementing in on several cases from different segments. But as discussed in Chapter 1.6, Limitations, this thesis will not be able to test the model on other segments than small container ships within the emission control area. Further studies on other segments are necessary in order to confirm the model on a broader level.

2.3 Research method – a case study

As actual data from the shipping industry will be used, and due to the limitations in scope for this thesis, it is considered by the authors that a case study will be an appropriate method to properly answer the research question. A case study can be defined as an empirical inquiry that “investigates a contemporary phenomenon within its real-life context and addresses a situation in which the boundaries between phenomenon and context are not clearly evident” (Yin, 1993). The advantage of using a case study approach is that it is a flexible method, allowing tailoring the design and data collection procedures to the research question (Meyer, 2001). On the other hand, there is a risk that the research will lack important aspects as the method is highly dependent on the researcher’s skills, knowledge and frame of reference (Meyer, 2001). The author’s knowledge regarding the chosen topic has to be defined as limited, while the analytical skills should be regarded as to expect on a graduate level. The aim is the broaden the knowledge and test the analytical skills of the authors by gathering and analysing a wide range of data and information made possible by the freedom given when applying a case study method.

In order to have a guideline to follow the main steps for a case study provided and described

by Collis and Hussey (2009) will be followed for this thesis. The steps are as follows:

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• Selecting the case – In research the usual approach is to attempt to make statistical generalizations that shows that it is possible to generalize from the sample to a larger population. This is however not necessarily the situation when conducting case studies although it might be attempted to make a generalization that the result from the selected case can generally be applied in another case.

• Preliminary investigations – This is mainly done in order for the researcher to get familiar with the context of the chosen case. The main critique for this approach is that it can affect the researchers thoughts and believes regarding the subject being studied and might lead to bias.

• Data collection – When collecting the data needed for the case study the researcher need to decide in advance how, where and when the data will be collected. The data can be in various forms, i.e. both quantitative and qualitative.

• Data analysis – The decision here is to decide wetter to perform in-case analysis or a cross-case analysis. As the data for this thesis will be from a single sources in case analysis will be performed.

2.3.1 Selecting the cases

The selection of shipping operators for this thesis is based on the limitations given by the research question; operators should only be active within the SECA, the vessels used should be containerships with a load capacity of between 500 and 2000 TEUs.

It has been implied from the discussions with industry professionals (Gavin Roser, Per Sjöberger) that the container segment would be the most suitable segment to look into and would be of more interest to the industry compared to e.g. RoRo and RoPax. It was mentioned during the interviews that RoRo and RoPax operations will have greater difficulty in implementing slow steaming, as it mostly associated with liner shipping and normally having very little room for increased lead time. This is also supported by the ISL study (2010) previously discussed in Chapter 1.2.

A further limitation when selecting the cases was made in order to make the data collection phase more manageable; the studied companies need to have an office in Sweden. It should be noted that the last limitation reduces the number of possible cases drastically, but was seen as the most effective way to acquire the data needed. The described limitations of the scope of this thesis helped narrow down the selection of suitable cases to a handful of companies.

2.3.2. Preliminary investigations

A preliminary investigation was made in two different areas; a broader investigation of the shipping industry and a more specific investigation of shipping companies suitable for a case study. The industry investigation is covered by Chapter 3, Previous Research. For the

investigating of shipping operators, the first step was to get familiarized with the companies

using information found on each company’s homepage. From the homepage ship data and

route schedules were investigated before contacts were made with the companies best

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suited for a case study. Background information about the selected companies together with a description of given opinions regarding the 2015 SECA regulation and its implications will be presented as an introduction to each case in Chapter 4.

2.3.3. Data Collection

In order to calculate to what extent slow steaming can be used to compensate for the increased cost due the 2015 SECA regulations, a variety of data is needed. In order to calculate the cost savings normally associated with slow steaming it is necessary to collect data regarding a ship’s fuel consumption, as well as the cost of fuel. The specific ship data, i.e. fuel consumption, was collected through official sources, i.e. homepages, given by the ship owners and by the engine manufacturers.

Due to the fact that the fuel consumption is only published for the ship’s design speed, theoretical calculations are required to estimate the fuel consumption at different vessel speeds. This will obviously lead to an increased uncertainty in regards of using the calculated data in the model. Current vessel speed, vessel speed logs and route history can be found online (MarineTraffic) for most ships, using GPS tracking. The current price for different marine fuels is also available on online databases (e.g. BunkerWorld and BunkerIndex), with up-to-date information from a wide variety of ports around the world. These sources can be considered primary sources, and is to our understanding used by many shipping companies and for most scientific reports as well. To make a viable estimation regarding future price level for marine fuel secondary sources must be used, since the databases previously mentioned only show current prices free of charge. To gain access to more sophisticated data a one year subscription has to be signed for a cost of over $2 000 (Bunkerworld, 2013).

Predictions of future fuel prices have thus been collected from industry reports, official market analysis as well as directly from the industry.

Gathering data regarding a shipping companies’ cost structure for a certain vessel proved difficult to attain, most likely due to commercial reasons. For this reason a general cost structure specific to container ships have been used (Delhaye, 2010). The specific cost structure was chosen after an extensive literature review, which revealed that several reports and studies had come to very similar conclusions (cf. Delhaye, 2010; Compass, 2010;

Copenhagen Economics, 2012). The different items, i.e. costs, in the chosen structure was then analysed individually to identify whether it would change with the implementation of slow steaming.

To give each case a broader perspective, representatives from the selected companies was

during an interview asked about the opinion of the 2015 SECA regulation, what the

perceived consequences are and what measures are, and will be, taken to comply with the

new regulation. These interviews also served the purpose of giving the authors a better

understanding of how different actors in the shipping industry operate and the reasoning

behind the chosen business decisions.

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2.3.4. Data analysis

The following approach has been used to analyse the data collected for this thesis. The 10 steps are selected by the authors as an attempt to successfully answer the research question of to what extent slow steaming can be used to compensate for the increased fuel costs associated with the 2015 SECA regulation. The 8 steps are as follow:

1. Calculate the theoretical fuel consumption for today’s operation speed at sea, for each of the two selected cases.

2. Calculate the fuel cost in 2015 year prices, when using HFO, i.e. create a base line scenario.

3. Calculate the theoretical fuel consumptions for each of the two cases at reduced speed.

4. Calculate the fuel cost at reduced speed in 2015 year MGO prices.

5. Calculate the change in fuel cost between the base line case, and the theoretical scenarios with decreased speed and MGO.

In order to get a better understanding whether it is practically possible to implement slow steaming, the following step 6-8will look at the lead time consequence of slow steaming,

6. Calculate the time for the route sailed by the ships in the studied cases at today’s operation speed.

7. Calculate the time for the same route, but at the decreased speed.

8. Calculate the change in lead time

2.4 Assumptions

Obviously supply and demand are two important factors to consider when doing economical calculations of this kind and an introduction of slow steaming is perhaps likely to interfere and upset the supply and demand balance existing today. However it has not been possible during the writing of this thesis to establish with great confident to what extent slow steaming will affect the demand for container shipping services. For that reason, as well as for the purpose of reducing the uncertainty in the calculated end results, it will be assumed for this thesis that the demand for container shipping services will be constant independent of whether slow steaming is implemented or not.

The cost structures for smaller container vessels, i.e. <3000 TEU’s, found during the literature review assume that the ship operator and the ship owner is the same. In contrast to this, the quest for suitable operators for the case studies revealed that the majority of Swedish operators, e.g. Unifeeder, charter its vessels, almost exclusively from German owners, e.g. Jüngerhans (Unifeeder, 2013; Jüngerhans, 2013).

When estimating the fuel consumption for different fuels, it is important to consider the

energy content of the fuel. It has previously been mentioned (in Chapter 1.2) that LNG

differs substantially in energy content compared to HFO. But more important for this thesis